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Can Good Taxpayers Get A Stamp of Approval?

You’re a consumer with a conscience. In the morning, you don
a sweatshop-free outfit, hop into your gas-conserving hybrid, and drive to the
local shop for some “fair trade” coffee.

One day, will you be able to invest only in corporations
certified to be good taxpayers? “Fair share” companies, perhaps?

That’s the (admittedly far-fetched)
idea a few accountants and economists entertained last week during a panel on
morality and taxes at a conference held at the University of San Diego School
of Law.

The idea comes as tax planning,
especially on the international corporate side, is under a harsh and sometimes
unwelcome microscope. Companies are finding themselves on the front pages for elaborate
tax structures that save them billions of dollars—and which, critics claim,
flout the spirit (though not the letter) of international law. In response to
the outrages—and to declining state revenue—the G-20 and the Organization for
Economic Cooperation and Development launched their sweeping Action Plan on Base
Erosion and Profit Shifting to overhaul the current global norms on tax
allocation.

Almost everyone agrees that the
rules need fixing. But during the years, or decades, before reforms are enacted,
should companies take it upon themselves to ensure they pay their morally
correct “fair share?”

It’s a lot more difficult than it
sounds, the panelists agreed.

After all, fair for whom? Most
multinational companies do business in dozens of countries, and all of those
countries can have very different ideas of how much in taxes should be paid for
them. That, in essence, is why transfer pricing exists. It’s a universally
agreed method for sorting out which corporate profits should be allocated
where.

Steven Wrappe of KPMG LLP in
Washington, D.C., one of the panelists at the conference, noted the difference
between “one-time interactions” like buying environmentally sustainable
resources, or fair trade-certified ingredients, and a relationship between two
taxing jurisdictions.

The controversies you see today
come from how tax principles are applied. Transfer pricing is based on assigning
a value to assets—often, intangible ones such as intellectual property—an inherently
subjective endeavor. Critics claim the current system is too good at avoiding double taxation, leaving profits lightly taxed
in small jurisdictions. There’s even a legalistic name for this: double
non-taxation.

Unlike the binary legal world most
of us regular tax filers live in—something’s normally either allowed by the IRS
or it’s not—international corporate taxation is mostly determined by ranges or
estimates. A U.S. company will sell an important patent to its foreign
subsidiary, creating taxable income in the U.S. Was the price correct? Good
attorneys can make very convincing cases that a particular piece of
intellectual property is worth only half of what it’s currently valued at—or,
if they want to argue the other way, three or four times more. Figuring out
where the law is—and where it should
be—can sometimes be impossible. (More on these issues here.)

Corporate tax planners face a
somewhat tricky tightrope to walk. The high-profile cases of alleged tax
avoidance may seem obviously egregious to a reader. But to accountants, what
causes headlines and what doesn’t can seem mostly arbitrary. Plan too
aggressively, and the corporate board could get a headache. Don’t plan
aggressively enough, and if shareholders feel you are not protecting their
investment, you could face a lawsuit—or a hostile takeover.

In theory, some sort of extra-legal
standard promoted by the OECD or non-governmental groups could mitigate these
issues. Wall Street is filled with funds that seek to invest money in a beneficial
but socially conscious way regarding the environment, labor standards or
health. Why not regarding taxes?

John Forry, a professor at the
University of San Diego and co-organizer of the conference, compared the idea
to funds that voluntarily divested from South Africa to protest its apartheid
policies in the 1980s.

But what would the standard for
fair taxes be? Would it be based on some sort of universal standard, or on the
policies (or practices) of individual countries? Could it be maintained with a
supply chain across several jurisdictions in a way that isn’t cost-prohibitive?

And, of course, there’s the issue
of how to market it. The sad fact is that most socially conscious behavior from
corporations also are designed to enhance their brand value. This is why fair trade
coffee comes with a sticker and hybrid cars have a label.

The truth is companies are already
thinking about these things. In any tax structure, a company will consider its
risk—risk of audit, risk of adjustment, and what’s known as “reputational
risk,” or the risk to the brand. As the media has begun to focus more on
international taxes, corporations’ own internal scrutiny has grown, as well.

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